Is MiTAC Holdings (TPE:3706) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that MiTAC Holdings Corporation (TPE:3706) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for MiTAC Holdings

What Is MiTAC Holdings's Debt?

As you can see below, MiTAC Holdings had NT$2.31b of debt at December 2020, down from NT$4.60b a year prior. However, its balance sheet shows it holds NT$7.04b in cash, so it actually has NT$4.73b net cash.

How Strong Is MiTAC Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that MiTAC Holdings had liabilities of NT$12.5b due within 12 months and liabilities of NT$1.89b due beyond that. Offsetting this, it had NT$7.04b in cash and NT$5.29b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$2.08b.

Since publicly traded MiTAC Holdings shares are worth a total of NT$35.2b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, MiTAC Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that MiTAC Holdings's load is not too heavy, because its EBIT was down 85% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if MiTAC Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. MiTAC Holdings may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, MiTAC Holdings recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that MiTAC Holdings has NT$4.73b in net cash. So we are not troubled with MiTAC Holdings's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for MiTAC Holdings you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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